India is huge The informal economy is both a blessing and a curse. The hundreds of millions who toil there — without contracts, outside the tax system, often on miserable incomes — are the human engine for the country’s farms, street vendors and rickshaws, providing food, transportation and even phone repairs and currency exchange. They shape what India looks like (the crowded markets), sounds (the hum of negotiations) and smells (the food trucks that line the streets). And it’s the sector’s resilience that keeps the country going through even the most trying times, soaking up unemployment.
But these sights, sounds and smells may be less ubiquitous in the future as there are signs that work is changing in India. Data from a number of sources suggests that the country’s workforce is becoming more formal. In the first half of India’s fiscal year ended September, the number of employees registered with the National Pension Fund increased by 35% compared to the same period last year – an increase equivalent to 9 million. The number of companies paying goods and services tax, an indicator of formal business start-ups, has risen from 8 million to 14 million since 2017. Online postings on recruitment sites like Monster suggest a similar rise in formal employment.
The shift is so large and sudden that observers are looking for an explanation. Inevitably there are quirks in the data. Pension fund registration is required for companies with more than 20 employees, meaning an increase by just one person could increase the recorded roles by 21 — a technicality that can exaggerate fluctuations during an economic boom. And as it recovers from Covid-19, India’s economy is growing rapidly. Estimates suggest so bip increased by around 7% in 2022. But quirks can only explain so much. As Rahul Bajoria of Barclays, a bank, notes, the volatility is large enough and appears across such a wide range of indicators that a significant real-world shift is likely underway.
Wage data registered with the pension insurance institutions provide information about the new employees. There are gains in every age group, but the largest are for people aged 18 to 25, suggesting that the inflows may have come from new jobs rather than transferring old ones to a formal basis. The largest category, accounting for 38% of new hires, is “expert services,” which includes programmers and clerks, reflecting the country’s growing importance as a destination for technical and back-office services. The second largest is “cleaning and sweeping services,” exactly the kind of jobs that would not have previously been registered.
Strong business trends are likely to explain the change. India has transformed its financial architecture. A goods and services tax introduced in 2017 requires companies to pay a tax on purchases that can be offset against sales. Getting this money back is an incentive to register with the authorities. Meanwhile, a government-backed electronic payment system has grown rapidly since its establishment in 2016. It leaves a trail that can be monitored, reducing bypasses.
Multinational giants now provide a larger share of employment – and are generally not the tax-evading type. Foxconn, a Taiwanese electronics manufacturer, is building apartments near Chennai that will accommodate more than 60,000 workers. Dixon Technologies, an Indian Foxconn-like subcontractor with dozens of foreign customers, has grown from 1,500 to 20,000 employees in the past five years. The smaller firms that serve such regulated businesses, from the groceries consumed by workers to the endless trucks that support logistics, must be formal enough to fit into their payment and tracking systems.
The Center for Surveillance of the Indian Economy, a research firm, believes that another factor behind the increase in formal employment is growth in people-intensive industries, particularly tourism and hospitality. These are increasingly chains rather than independent pensions. It is a boon for the Indian government that more hotel and restaurant workers contribute to the public finances. And it may come as a surprise to future vacationers if the land that greets them is a little less rugged than it used to be. ■
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